Account Types and Registrations

Every customer account answers two questions. What may it do, and who owns it? The exam gives you a fact pattern and wants the right account or registration.

Cash, margin, and options accounts

In a cash account the customer pays in full for every purchase. Regulation T, the Federal Reserve rule on customer credit, requires payment two business days after settlement. Settlement is T+1, so payment is due on T+3.

A margin account lets the customer borrow part of the purchase price from the broker-dealer. Regulation T sets the initial margin requirement at 50% for marginable stock. Buy $20,000 of stock and you deposit $10,000; the firm lends the rest and charges interest.

The customer signs a margin agreement that pledges the securities as collateral, a pledge called hypothecation. If the stock falls too far, the firm issues a margin call for more money. A margin customer can lose more than the amount deposited; a cash customer cannot.

An options account is a cash or margin account a principal has approved for options trading. Before the customer's first options trade, the firm delivers the Options Disclosure Document (ODD), titled Characteristics and Risks of Standardized Options. The customer returns a signed options agreement within 15 days of approval.

Retirement and custodial accounts must be cash accounts.

Who decides the trade

In a non-discretionary account the customer approves every trade before it happens.

A discretionary account lets the registered representative trade without asking first. Discretion means choosing any one of three things:

• the asset: which security
• the action: buy or sell
• the amount: how many shares

Before the first discretionary trade the customer must sign a written authorization, and a principal must accept the account in writing. The firm marks each discretionary order as discretionary.

A registered representative may pick the time and the price alone. A customer who says "buy 500 shares of ABC today, you pick the moment" has already named the asset, the action, and the amount. No authorization is needed.

How the customer pays

A commission account charges for each trade. Ten trades cost ten commissions, and a quiet year costs almost nothing.

A fee-based account charges one annual fee, usually a percentage of the assets held, that covers advice and trades. Trading more costs nothing more.

Choosing between them is itself a recommendation the firm must justify under Regulation Best Interest. A customer who trades twice a year rarely belongs in a fee-based account.

Educational accounts

A 529 plan is a state-sponsored account for education costs. Contributions go in after tax, and growth plus qualified withdrawals are free of federal tax. The owner keeps control and may switch the beneficiary to another family member.

A Coverdell Education Savings Account follows the same tax pattern, with a $2,000 yearly cap per beneficiary.

Registrations: who owns the account

• Individual: one owner, one person trading, assets passing to the estate at death.
• Joint: two or more adults, each with full authority to trade the whole account.
• Corporate or institutional: the firm needs a corporate resolution naming who may trade, and the charter must allow margin or options.
• Partnership: the firm needs the partnership agreement, which names who may trade and whether margin is allowed.
• Trust: a trustee manages the assets for the beneficiary under the trust document.
• Custodial: one adult custodian manages the account for one minor.

Joint accounts take one of two forms, and the exam tests the split. Under joint tenants with right of survivorship (JTWROS), a dead owner's share passes straight to the surviving owners. Under tenants in common, each owner holds a stated percentage, and a dead owner's share passes to that owner's estate.

A revocable trust can be changed or cancelled by the person who created it. An irrevocable trust cannot, so the grantor gives up control for good.

A UTMA account (Uniform Transfers to Minors Act) carries the minor's Social Security number, because the minor owns the assets. Gifts into it are irrevocable, and control passes to the child at the state's age of majority.

Retirement accounts

A traditional IRA takes contributions that are usually deductible. Earnings grow untaxed, and every withdrawal is taxed as ordinary income.

A Roth IRA takes after-tax contributions, so nothing is deductible. Qualified withdrawals, growth included, come out free of tax.

Four rules cover both:

• Contributions need earned income. Wages count; dividends, interest, and pension payments do not.
• One annual limit covers both accounts together. The IRS indexes it each year, and for 2026 it is $7,500, plus a catch-up amount at age 50.
• Withdrawals before age 59 1/2 normally cost a 10% penalty on top of ordinary income tax.
• Contributions for a tax year are allowed until that year's filing deadline.

A required minimum distribution (RMD) is the amount an owner must take out each year, beginning at age 73. The first RMD may wait until April 1 of the following year, and every later one is due by December 31. Roth IRAs carry no RMD while the owner is alive.

A qualified plan is an employer plan that meets IRS and ERISA rules and earns pre-tax treatment. Defined benefit plans promise a set retirement payment, and the employer carries the investment risk. Defined contribution plans, such as the 401(k) and the 403(b), promise a set contribution, and the employee carries the risk. Contributions go in before tax, grow tax-deferred, and come out taxed as ordinary income under the same RMD rules.

How this gets tested

Most questions give one fact pattern and want one match.

"One joint owner dies and the survivor keeps the whole account." That is JTWROS. Tenants in common sends that share to the estate.

"A registered representative sells a position the customer never discussed." That is discretion. It needed written authorization and principal acceptance first.

"Which account may never buy on margin?" An IRA or a UTMA account.